Central bank worried about downside of growth

Falling expectations for price gains in Korea are raising concern at the central bank and point to more interest-rate cuts to combat low inflation, according to Samsung Securities and Nomura Holdings.

The break-even rate in the bond market - an indication of where traders see future price levels - tumbled to a record low 0.98 percent in November. The Bank of Korea’s own survey of household inflation expectations is also at an all-time low of 2.7 percent.

The central bank has cut its benchmark rate twice this year, to match a record low 2 percent, as it joined policymakers from Tokyo to Frankfurt in extending monetary easing. Minutes of the bank’s Nov. 13 meeting released this week showed one of the seven board members said the bank should prioritize overcoming low inflation, while another warned that weak inflation expectations may suppress actual price gains.

“The recent minutes show BOK members have become more dovish and are worried by the negative impact of low inflation,” said Shin Hong-sup, a fixed-income analyst at Samsung Securities in Seoul. “The typical policy response for this would be a rate cut, although board members didn’t openly show their thoughts in the minutes.”

Samsung Securities last week scrapped its forecast for rates to remain unchanged in 2015 and now projects at least one reduction of 25 basis points next year, according to Shin. Nomura economist Kwon Young-sun wrote in a Dec. 2 report that the latest minutes were dovish, with almost all BOK board members seeing downside risks to growth and inflation. Nomura forecasts two rate reductions in 2015, to 1.5 percent.

Consumer prices increased 1 percent in November from a year earlier, and have trailed the central bank’s target range of 2.5 percent to 3.5 percent for more than two years. The Korea Development Institute said in a Nov. 25 report that prompt and preemptive monetary easing is needed to prevent deflation.

Bloomberg